Sterling was slightly weaker on Wednesday as the euro rose and traders waited to see whether Britain will be able to clinch a post-Brexit trade deal with the European Union during this week’s negotiations.
Also on Wednesday, Chancellor Rishi Sunak will present the details of the Spending Review, which will coincide with the Office of Budget Responsibility releasing its latest projections for the British economy.
Most in the market expect a post-Brexit trade deal to be agreed, even if it is a bare bones one, with some talks continuing into the next year.
Meanwhile, EU banks will have to use platforms inside the EU to trade derivatives from January, the bloc’s securities watchdog said on Wednesday, a move that could cut off the City of London, the world’s biggest derivatives trading hub.
Bank of England interest-rate setter Michael Saunders said the long-term effects of Brexit could have a bigger impact on companies than the coronavirus pandemic.
The pandemic has already wiped off some of Britain’s economic strength, and as result, prospects for its currency.
Britain’s finance ministry said on Tuesday that the government would spend more than 4 billion pounds ($5.3 billion) over the next three years to get the long-term unemployed and other job-seekers back to work after the pandemic.
Britain’s government is on track to borrow roughly 400 billion pounds ($534 billion) this financial year as it struggles with the social and economic impact of COVID-19, which has killed more than 55,000 people.
MUFG said that “the UK will certainly be worse than most” developed countries as they borrow more to fight the effects of the novel coronavirus.
On a like-for-like basis, the UK deficit was estimated at 16.5% this year, the third worst across all advanced countries, MUFG said. And by 2025, the UK was still projected to have a deficit of 4.4% of gross domestic product, again the third worst.
“Given the severity of the GDP contraction for the UK this year is also likely to be worse than other advanced countries, the way back for the UK is likely to be more difficult and longer,” MUFG’s head of research Derek Halpenny said, adding this was the reason why he has a negative view on sterling.
The pound was last trading down 0.1% at $1.3345 and also down by 0.3% against a stronger euro at 89.24 pence.
Options costs for protection against unexpected moves in sterling subsided across all maturities, with the three-month costs trading at a four-month low of 8.5%. One-week and two-week options costs – suggesting implied volatility in sterling – were somewhat more elevated.
Reporting by Olga Cotaga. Editing by Jane Merriman